The Business Case for Sustainability

Chris Davis ’76 gave up a high-powered legal career to spread a message the world cannot afford to ignore: “Climate change is a risk to the entire global economy.”

Davis argues that businesses must become sustainable, “generating long-term shareholder value by embracing opportunities and managing risks from economic, environmental, and social issues.” As director of the investor relations program at Ceres, a nonprofit that advises corporations and institutions on sustainable business practices, he puts his argument into action.

Davis and his colleagues at Boston-based Ceres are proponents of paying attention to the Triple Bottom Line (TBL) as a way of evaluating if a business is sustainable. TBL is an idea hatched in England almost 20 years ago. The United Nations and community governance groups embraced it as an accounting standard about six years ago, and the idea is gaining credibility in the private sector, too. TBL calls for businesses to track and report environmental, social, and governance—a.k.a. E, S, and G—metrics as well as conventional profits and losses.

According to Davis, the sustainability concept is helping companies widen their thinking. “Some of the most successful businesses, like IBM and 3M, are good at not only the financial part, but the E, S, and G parts,” he says. And he’s working to show other corporations the value of environmental, social, and governance factors.

ECONOMIC CLIMATE: Chris Davis urges executives to see the long-term connections between prosperity and sustainability.

DAVIS WORKS AT THE INTERSECTION of big money and environmentalism. He rubs elbows with Fortune 500 executives, money managers who control billions of dollars, and eco-celebrities such as Bill McKibben, who founded 350.org to help solve the climate crisis.

Davis himself has been interested in environmental issues since high school, when the first Earth Day grabbed his attention. At Dartmouth, Professor Hans Grethlein, who taught courses on systems and environmental engineering, and Gordon McDonald from the College’s fledgling Environmental Studies Program, influenced him as well. Having come of age when fire on Ohio’s Cuyahoga River was symbolic of the country’s pollution problems, Davis started his career in wastewater treatment. He worked in that field for two years and was on the verge of returning to Thayer for an advanced degree when he realized, as he puts it, that “my verbal skills were better than my quantitative abilities.” He left his engineering job and enrolled at Harvard Law School, where he later became a member of the Harvard Law Review.

After practicing environmental law for almost 30 years, Davis joined Ceres in 2010, taking an 80 percent pay cut to gain a new career direction. “I quit as a partner at a big law firm because I was convinced I wasn’t working on things that made a difference,” he says. “I wanted to spend the rest of my working life trying to solve problems like climate change.”

His personal pay cut aside, the economic case Davis makes for sustainable business and investment strategies is straight and to the point: Socially conscious investing isn’t code for poor monetary returns.

“Big companies are starting to get that sustainability issues should be integrated into corporate strategy and management. These things are important and impact the bottom line. There is an increasing amount of data that suggests that this isn’t just feel-good stuff. Sustainable business practices really matter. Deutsche Bank did a meta-analysis that came out last year of more than 100 academic studies that showed in virtually all cases, companies that had a high rating for sustainability had superior financial performance and had a lower cost of capital in terms of raising debt and equity,” says Davis. Other studies, he notes, report that companies with high sustainability ratings outperform market averages in the long term.

Like many in the environmental community, and even some in the business community, Davis is a critic of quarterly capitalism. “It’s bad for everybody except the traders and speculators and hedge funds. If you are managing a perpetual endowment or pension fund, you need to take a longer view, which is not necessarily beating your benchmark every quarter,” he says. Davis is aware that making the case against quarterly capitalism can be tough because the compensation packages of many money managers, his target audience, are based on annual results. Even so, he says, “We argue for long-term capital investment strategies.”

Thinking long-term makes it hard to ignore climate change. Indeed, corporations and investors are paying more attention to scientists and environmentalists on the realities and consequences of climate change. Accordingly, Ceres has been advising its partners, including heavyweights such as the California Public Employees’ Retirement System (CalPERS) and BlackRock, to ask more questions about sustainability and risk. For example, if a pension firm owns stock in an oil company that has extensive coastal refineries, what long-term risks does the firm face from rising sea levels and stronger hurricanes? Large institutional investors need that kind information to make smart choices for their portfolios, Davis insists.

Increasingly money managers are feeling pressure from their stakeholders to do something about climate change. Dartmouth is a case in point. When environmentalist Bill McKibben and writer and activist Terry Tempest Williams came to campus this past May to advance their campaign for colleges to divest from fossil-fuel stocks, a standing-room-only crowd filled 105 Dartmouth Hall, and 400 people signed a divestment petition addressed to the Dartmouth trustees.

Davis, who answered questions about divestment when he delivered a Jones Seminar on Science, Technology and Society at Thayer School last January, advises students to take a more nuanced approach to the issue. Students need to “understand a little about fiduciary duty,” he says. “It would be irresponsible and illegal for trustees to make a political statement in how they invest the endowment.” Instead, Davis says, students should ask for a climate and carbon risk assessment of the portfolio. They should also ask tough questions, such as: How big is the carbon footprint of the portfolio? How dependent is it on investments in so-called dirty energy? “Students need to figure out how the endowment can be part of the solution while still earning strong returns,” he says.

Davis is not defending the status quo for investors or big oil. “Oil companies have reasonably good short-term returns, but the transition to a low-carbon economy is essential or we’re going to cook the world,” he says.

“There are real risks in investing as usual,” he points out, “and money managers need to take a serious look at a portfolio from a fiduciary duty standpoint. Ignoring environmental factors and ignoring sustainability or not seriously integrating them into an investment strategy is not consistent with fiduciary duty.”

Pension funds and endowments won’t sell their investments in fossil-fuel companies instantly for two reasons. “Immediate divestment of fossil-fuel companies may not be a legal option trustees could exercise,” says Davis, speaking as a former lawyer. A second reason is the amount of money involved. The energy sector is worth some $6 trillion, and there are not enough sustainable businesses or new technologies to absorb all that money right now. Instead Davis argues that a five-year window for divestment and reinvestment is more realistic.

As Davis convinces money managers about the benefits of sustainable investing, the capital they invest will fund a host of new opportunities [see sidebars below].

Davis urges engineers who will help create those opportunities to think broadly. “All engineering and business problems have technical, operational, environmental, social, political, and financial dimensions, all of which need to be addressed for a successful solution,” he says. “Getting it right technically might get you halfway there.”

And in today’s climate—both business and environmental—halfway is not a viable option.

—Lee Michaelides is a contributing editor at Dartmouth Engineer.

Opportunities in Sustainability

PROGRESS: “Big companies are starting to get that sustainability issues should be integrated into corporate strategy and management,” says Davis.

Which business sectors will grow as the global economy embraces sustainability? Here’s Chris Davis’ list:

Healthcare (“A sustainable business has happy, healthy employees.”)

Energy efficiency

Renewable energy

Distributed generation (“The future is not giant power plants.”)

Green buildings

Improved operational efficiency

Life cycle analysis of products

Sustainable agriculture

Transportation efficiency

Waste reduction and recycling

Water-efficient technologies

Building a Better Future

Thayer faculty recommendations of technologies that show promise for sustainability.

Cross-laminated timber systems. More widely used in Europe than in the U.S., these are being used for larger-scale structures (buildings 20 stories tall or more). Using timber rather than steel and concrete is more sustainable, as the wood is renewable, recyclable, recoverable, and stores carbon.—Professor Vicki May

Fusion energy. It will require massive social commitment to make a scaled-up system of supply and distribution, but it is capable of removing energy as a constraint on development and the accompanying distortions.—Professor Daniel Lynch

Hybrid-electric and high mpg vehicles; solar hot water heating. These open up the possibility to dramatically reduce energy use and carbon production without a significant paradigm shift or painful modification of behavior/habits of the general public. Rethinking building management and intelligently designing heating and cooling processes—for example, solar hot water heating—could have a tremendous impact.—Professor Jason Stauth

Hydraulics. Using pumps and high-pressure fluid to transfer power from offshore wind turbines or hydrokinetic tidal turbines to on-shore electric power-generating stations may prove to be a more economical way to harness wind and tidal energy.—Professor Brenden Epps

Integrated food production systems. Beef production accounts for more than half of all land devoted to agriculture in the United States and yet delivers a much smaller fraction of both calories and protein. The land devoted to beef production could be devoted to producing food in a more land-efficient way, thus lessening pressure to clear land, which is a major source of habitat loss and greenhouse gas emissions. Producing and consuming food in a more land-efficient way could also make room for biofuels, which likely have to be substituted for fossil fuels in a carbon-constrained world for a significant—about half—of mobility requirements.—Professor Lee Lynd

Net zero homes. They’re available now and will become more affordable with faster paybacks every year.—Professor Solomon Diamond

Photovoltaic solar energy; smart buildings and cities. Photovoltaic solar technology has made significant progress, and prices are coming down. Smart buildings and cities, which use censors and remote control to balance energy loads, decongest traffic, and the like, are reducing energy consumption and emissions.—Professor Benoit Cushman-Roisin

A smart grid. It enhances the integration of renewables into our energy mix.—Professor Mark Borsuk

Pulse-Electro-Thermal Deicing. PETD technology uses quick pulses of electricity to instantly loosen ice from surfaces such as solar panels and wind turbine rotors. (In the United States and Canada about 17 percent of power generated by windmills is lost due to rotor icing.) The technology can remove ice from windshields in two seconds using very low energy from a car battery. If used to loosen ice in commercial, industrial, and residential icemakers, PETD would save up to 40 percent of electric energy used by those devices. If used in no-frost refrigeration and AC-evaporators, PETD could save from 15 to 40 percent of electric energy.—Professor Victor Petrenko